Kazakstan's Austerity Budget Fails to Impress

As government downscales its budget forecast yet again, experts warn that the poor are not sufficiently cushioned against downturn.

Kazakstan's Austerity Budget Fails to Impress

As government downscales its budget forecast yet again, experts warn that the poor are not sufficiently cushioned against downturn.

The latest set of changes to the Kazak government’s budget contain the most pessimistic predictions yet about the state of the economy in 2009, although officials insist their austerity measures do not include cuts to essential services.

Critics of the plan, meanwhile, say maintaining current levels of benefits is meaningless as inflation will render them worthless, and some argue that the government should be cutting back to a level that is sustainable.

The upper house of the Kazak parliament, the Senate, approved the budget on April 8, two weeks after the lower house reviewed it it.

In a sign of how swiftly expectations have been curtailed, this latest budget represents a substantial revision of a document approved only in December, which was itself a more pessimistic version of the government’s original spending plan for 2007.

In drawing up the budget, the government based its figures on the expectation of low growth. In the December version of the budget, the authorities were anticipating a 2.7 per cent year-on-year rise in gross domestic product, GDP, but now it is expected to rise by a mere one per cent, when inflation is taken into account. That would be a poor showing for an economy that until the start of last year was expanding by eight or nine per cent annually.

Presenting the new figures to the cabinet on March 4, the Minister for Economy and Budge Planning, Bahyt Sultanov said they had been shaped by the continued global slowdown, cheerless commodity price forecasts and the experience of last year, when Kazakstan first began feeling the effects of crisis.

The rate of economic growth and the scale of export revenues have both been reined in by falling world demand – and prices – for oil and metals. The budget is calculated on an oil price of 40 US dollars a barrel – last summer saw a peak of nearly 150 a barrel.

Another factor in the low growth prediction is the end of the construction boom of recent years, as bank loans against new buildings dry up. Meanwhile, the inflation rate is predicted to hit 11 per cent year on year, partly as a result of the recent devaluation of the tenge which has bumped up the prices of imported goods on the local market.

In the new budget, the net balance of spending and revenue is actually little changed from December, and will result in a modest deficit of 2.8 billion dollars, equivalent to under four per cent of GDP.

But looking at the raw figures underneath that, there have been seismic shifts. The government is now expecting to receive 20 per cent less in taxes and other revenues than it was anticipating only four months ago.

However, instead of cutting back on expenditure plans, the government has increased them. Sultanov noted that some of this extra money was designed to mitigate the effects of economic crisis – job creation and retraining programmes, and grants for highflying university students who cannot afford the fees.

Boosting spending while revenues fall would ordinarily have created a yawning deficit. However, the government says it has found the bulk of this money by applying two basic mechanisms. First, it is drawing about 2.3 dollars out of its national oil fund, where a proportion of revenues have been stored up against a rainy day over the years. Second, it is saving somewhat less than that amount by shaving costs off a number of expenditure items – freezing new projects, reducing funding for state organisations, for example by postponing repairs and acquisitions.

At the same time, Sultanov insisted there would be no cuts to the money set aside for public sector wages, pensions and benefits.

At the cabinet meeting where the plan was laid out, Prime Minister Karim Masimov said, “At the moment we need to live according to our means. If we start planning to spend money that we don’t have, we will end up somewhere else entirely. So although this is painful, we have to do it.”

Few economists were surprised by these austerity measures, although not all would say they go far enough.

“It’s an appropriate realistic move given the crisis in the world economy and in Kazakstan,” said economic expert Magbat Spanov. “There was talk of it even when they approved the 2009 budget [in December], with the stress on tightening belts and leaving only the indispensible expenditure on social requirements.”

Others argue that pledges not to cut social spending are not enough given that the value of wages and benefits is low already, and likely to be eroded further by inflation.

Irina Savostina, who heads a pensioner’s movement called Pokolenie, said the economic crisis had already hit vulnerable groups including the retired.

“The minimum pension currently stands at 9,800 tenge, or just over 65 dollars, which is less than the minimum subsistence wage. It’s impossible to live on that,” she said. “Just since the beginning of the year, inflation… has eaten up the miserable pension increase that was announced so loudly at end of last year.”

A staff member at the Almaty Centre for Employment, dismissed official pledges of support for welfare as purely “decorative”.

“The ranks of the unemployed are growing, and the pitiful amount they get in benefits is not going to help them,” he said.

A teacher from Almaty who gave her name as Alfia pointed out that public sector wages were often held up. She and her colleagues have only just received their January pay.

“It included a small increase but by the time we got the money, price rises made it effectively meaningless.”

Petr Svoik, an economist who is deputy leader of the opposition party Azat, believes that despite the revisions, the budget still reflects unrealistic hopes. He says the government needs to work from the premise that metals and oil prices are not going to rise any time soon, and also that it should avoid financing its spending from unsustainable sources.

“The budget should be calculated based on real revenues,” he said. “The deficit is now being made up for with money from the National [oil] Fund and from the pension funds. That money will be exhausted, and in future they will be forced to cut social spending, which will of course be a severe blow for Kazakstan’s population.”

Some economists say that despite efforts to cut spending wherever possible, there is still some slack.

Gulnur Rahmatullina, head of economic research at the Institute of Strategic Studies, which is linked to the Kazak president’s office, questions a decision to transfer of a number of events at the 2011 Asian Winter Olympics from Kazakstan’s biggest city, Almaty, to the capital Astana. She notes that the games already account for a substantial proportion of this year’s spending plans, and says that shifting events at a time like this is “baffling” – especially since money has already been spent on some of the sports facilities in Almaty.

More broadly, Rahmatullina is perturbed at the fact that this is the third time the government has rewritten its budget in a short space of time. That suggests to her that realistic figures are not being used for the calculations.

Svoik suggested that further revisions might follow as it becomes apparent that low commodity prices are here to stay.

Spanov, meanwhile, argued that poorer people in Kazakstan were likely to suffer this year, however much the government promised to sustain spending.

“It would be silly to assert that social programmes aren’t going to be affected. There is only the one budget, and it is not elastic,” he said. “There are expenditure items the government will never touch - funding for domestic and external security, plus money for the institutions of state. Therefore, other subsidised areas like schools and hospitals will experience interruptions in the flow of funding.”

He concluded, “I think the measures now being undertaken by the government are aimed at survival. In other words they aren’t really thinking about how to fix the situation, just how to keep things afloat.”

Elmira Gabidullina is an IWPR contributor in Almaty.

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